Regional Heterogeneity and Monetary Policy

Joseph Vavra, Erik Hurst, Andreas Fuster and Martin Beraja

No 270, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We argue that the time-varying regional distribution of housing equity shapes the aggregate consequences of monetary policy through its influence on mortgage refinancing. Using detailed loan-level data, we begin by showing that: (i) the refinancing response to interest rate cuts is strongly affected by regional differences in housing equity, and (ii) both regional differences in refinancing and overall refinancing vary over time with changes in the regional distribution of house price growth and unemployment. Then, we build a heterogeneous household model of refinancing in order to derive aggregate implications of monetary policy from our regional evidence. We find that the 2008 equity distribution made spending in depressed regions less responsive to interest rate cuts, thus dampening aggregate stimulus and increasing regional consumption inequality, whereas the opposite occurred in some earlier recessions. Taken together, our results strongly suggest that monetary policy makers should track the regional distribution of equity over time.

Date: 2017
New Economics Papers: this item is included in nep-dge, nep-geo, nep-mac, nep-mon and nep-ure
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Citations: View citations in EconPapers (41)

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Working Paper: Regional Heterogeneity and Monetary Policy (2017)
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